How does fringe benefits tax affect motor vehicles?

June 30 is the end of the financial year and that means it’s tax time.

If you’re a business owner, you run a small fleet of motor vehicles and you let the workers who drive the vehicles during the week take them home at the weekend but you don’t declare this to the Australian Taxation Office (ATO), you could be in a world of trouble.

Vehicles your employees drive during private hours are considered a fringe benefit – they supplement the cash component of the employee’s salary package.

According to the ATO, there are numerous classes of fringe benefits, not just cars, but company cars are frequently the fringe benefit of choice for employees.

While the worker reaps the benefit, it’s the employer paying the fringe benefits tax (FBT). But the ATO does exempt ‘limited private use’.

Just to be clear, using the car for weekends away camping or a road trip to watch the footy would not be considered by the ATO to be ‘limited private use’.

The ATO’s online calculator helps you work out what your business will pay in FBT at the end of the financial year.

The calculator poses a number of questions to arrive at the number you need to know, namely:

The operating cost method to calculate FBT requires accurate records tracked in a logbook. Otherwise, taxpayers leave it to the ATO to calculate the tax amount using the statutory formula method.

For the sake of record-keeping, the financial year for FBT calculation begins on April 1 and ends on March 31 of the following calendar year. It does not align with the standard financial year in Australia. Taxpayers must lodge an FBT return by May 21 each year.

The ATO recommends sharing the FBT with the employee enjoying the benefit if the business needs to reduce its FBT exposure.

If the employee agrees to make a cash contribution, that can be deducted by the online calculator to arrive at a lower taxable sum for the employer.

It’s a tricky discussion to be had with the employee, of course, because the onus is then placed on the worker to pay part of the FBT. On a higher pay scale to offset their contribution, the employee may slide into a higher tax bracket.

A better idea, if the employee is open to this, is negotiating a novated lease for an electric vehicle.

For a conventional car or ute that’s purchased with a novated lease, the employee pays the lease repayments from his or her gross (pre-tax) wage. The worker doesn’t incur tax for that component of their gross wage that pays the lease. But the business still pays FBT on the novated lease.

It’s different, however, if the car is a zero-emissions vehicle. The federal government has exempted battery-electric vehicles from FBT, provided the vehicle was first used after July 1, 2022, and was not subject to the luxury car tax (LCT).

The vehicle itself must be designed for a payload below one tonne and carry no more than nine passengers (including the driver). It’s the best of both worlds: the employer pays no FBT, and the worker gets a new car for a comparatively minor dip in his or her take-home pay.

The government previously exempted plug-in hybrids from FBT, but that exemption has ended with effect from April 1, 2025.  If your employee prefers a plug-in hybrid, because it provides long-range country touring ability with the petrol engine, and low running costs and an eco-friendly electric powertrain for the suburbs, you’ll be paying FBT on that vehicle.

If your employee entered into a novated lease contract before April 1 of this year, and the vehicle was in use prior to the cut-off date as well, the novated lease on the vehicle remains free of FBT – provided the employer and the employee are bound by an ongoing financial commitment.

The ultimate end date for plug-in hybrid exemption is scheduled for March 31, 2027, and any extension to the lease prior to that date won’t be considered ‘binding’ by the ATO.

In other words, if the lease of a plug-in hybrid commenced before April 1, 2025, the business would be exempt from fringe benefits tax right up until March 31, 2027.

But bear in mind that a lease expiring after the exemption end date of March 31, 2027 will incur pro rata FBT for the employer to pay.

There are plans in place to review the exemption for battery-electric vehicles soon but nothing has been decided yet, which makes them currently a better choice for an FBT-free novated lease.

There is one other trap for the unwary: buying a used EV that was registered and operated prior to July 1, 2022. That vehicle, sold used to another company, will not be exempt from FBT, because it hit the road before the start date for the FBT exemption – so beware…

This article contains general information only. Seek independent financial advice that considers your own circumstances.

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